1. Purpose of Report
“Report to highlight the implications of FDI in Indian retail on Indian economy on
the basis of secondary information”
Background
Globally, there has been significant change in the retail sector over the past two
decades. Much of the rapid growth in organised retail business in the developing
countries is due to the entry of global retailers. Indian retail industry is the largest
industry in the private sector employing around 7% of total labour force and
contributing to over 10% of the country's GDP.
It is six times bigger than Thailand and five times larger than South Korea and
Taiwan. India is in the midst of a retail boom.
Indian Retail at a Glance
• Known as a Nation of Shop keepers with around 12million retail outlets
• The share of unorganised sector is around 96%
• The current worth of Indian retail is USD 300billion &expected to grow to
USD 450- 600 billion by 2010
• Food & Grocery constitutes about71%of total retail sales
• Growth rate since 2004 is 25% - 30 %
• Contributes to GDP around 10%
• Second largest employer after agriculture contributing to 7% of total labour
force & expected to generate 2.5 million new jobs by 2010.
• Government policy intiatives on FDI:
a) Single brand retailing upto 51% subject to Govt. approval
b) Cash & carry wholesale trade 100 %on automatic route
• FDI inflows into the industry for the year 2008-09 amount to US$ 27.3
billion
FDI in Indian Retail
Given this background, the report also would like to bring out the rosy side of Indian
retail. India is being seen as a potential gold mine for retailing by investors all over
the world. The latest research has rated India as the top destination for an attractive
emerging retail market. (AT Kearney’s GRDI for 2008, India ranks second to
Vietnam. It topped the list in the year 2007.) Recent Ernst &Young study predicted
Mumbai and Bangalore to be the next promising global centres along with Shanghai
for retailing. India’s vast middle class and the country’s untapped retail industry are
the key attractions for global retail giants wanting to enter Indian markets. The WTO
has also been planning to withdraw tariff and trade privileges provided to India under
the new General Agreement on Tariffs and Trade if FDI is not allowed.
The brands planning an India entry include The Pizza Company and Spicchio Pizza
(both pizza chains from Thailand), Coffee Club from Australia, Lolita Fashion, a
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2. Japanese brand, Revive Juice Bars from the UK, Mrs Fields Cookies and Jamba Juice
from the US, and Jules- French fashion brand. One can not ignore the WALMART‘s
back door entry in wholesale operations in Indian retail.
All the above factors and more importantly the major markets which are hit by retail
slump attracted many national and international players to enter this sector in a big
way. Several brands are targeting grade B and C cities rather than expanding in
metros, as smaller cities are more brand hungry and retail is not yet hit these cities.
With the presence of limited brands in Indian markets the country holds big
opportunity for these brands as this would also help them re-route inventories and
orders to new markets and keep their sagging sales volume intact
Importance of FDI in retail
FDI in retail and the development of larger stores and supermarkets have the
following advantages from the point of view of consumers and other stake holders.
• The larger supermarkets, which tend to become regional and national chains,
can negotiate prices more aggressively with manufacturers of consumer goods
and pass on the benefit to consumers.
• They can lay down better and tighter quality standards and ensure that
manufacturers adhere to them.
• Many consumer goods manufacturers will find that supermarkets account for an
increasing share of their sales and will be afraid of losing this valuable and
reliable customer to competition.
• The fact that a well-known chain of supermarkets sources from a manufacturer
becomes a stamp of quality.
• With the availability of finance, the supermarkets can invest in much better
infrastructure facilities like parking lots, coffee shops, ATM machines, etc. All
this will make shopping a pleasant experience.
• The supermarkets offer a wide range of products and services, so the consumer
can enjoy single-point shopping.
• The kirana shops in large parts of the country will enjoy built-in protection
from supermarkets because the latter can only exist in large cities.
• The ability of supermarkets to demand pricing and quality standards from
manufacturers will benefit even kirana shops, who can even buy from the
supermarkets to sell the same products in smaller towns and villages.
• With FDI in retail trade, India will become more integrated with regional and
global economies in terms of quality standards and consumer expectations.
The benefits for India from a liberal FDI policy on investments in the retail sector are
beyond just benefiting the billion-strong Indian consumer population, or merely
creating incremental job opportunities. Allowing FDI in retail would contribute to a
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3. multiple impact not only in retail sector but also in many other activities such as
manufacturing, food processing, packaging and logistic services. The largest benefit
in the medium term is a strong up-gradation of India’s agriculture and small and
medium manufacturing sectors. FDI will also facilitate Indian manufacturing to get
integrated with the global supply chain. Another positive rub-off of this improved
supply chain will be a better product basket from India for exports. Tax compliance
would be greatly facilitated through a more organised retail network in India,
generating more revenue for the central and state governments. Finally, it is
acknowledged that retailing has a strong bearing on tourism. Singapore, Hong Kong
and Dubai are the examples.
Policy on FDI in Indian Retail
Even 60years after Independence, policy-makers in India continue to be xenophobic.
Fears of foreign imperialism have not yet receded and continue to be a barrier for the
entry of foreign enterprises into retailing. India has opened almost the entire
manufacturing sector to FDI, including the most sensitive Defence equipment
manufacturing. But, ironically, a less sensitive and significant contributor to
economic growth, viz retail trade has been excluded from the liberalisation. More
importantly India is today the only major economy that still does not permit liberally
FDI in retail trade. 35 of the world's top 70 retailers have already entered China and
set up business. They have helped boost exports.
At present, India allows 100 percent FDI in cash-and-carry wholesale trading and
export trade in the sector. In the year 2006 the government had decided to partially
open the retail sector by announcing 51 percent FDI in single brand retailing subject
to government’s approval .But at the moment, the entry of retail giants of multiple
brands like Wal-Mart is not allowed. Global luxury brands such as Fendi, Louis
Vuitton, Nike, Llardo, Rino Greggio, Damro, Etam, Zegna and Lee Cooper were
among the first to get FDI permission under the single brand retail window.
Implications of the current policy initiatives
With the new regulations in place, the debate is that what will happen to these small
stores? Will the entry of global retailers wipe out these local stores or will it make no
impact? If we take China's example, the FDI in retail has little or no impact on the
local retailers and they still dominate the retail sector. Secondly, the decision may not
trigger the FDI flow as such as single brand retailers who wanted to be in India like
Nike and Reebok are already here through franchise and may find it tough to find
local partners willing to invest in business.
However opening up of the retail sector to the FDI has been fraught with political
challenges and also opposition from small traders. Some of their arguments include
the following.
• The global retailers will put thousands of small local players and fledging
domestic chains out of business.
• Would give rise to cut-throat competition rather than promoting incremental
business.
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4. • Promoting cartels and creating monopoly.
• Increase in the real estate prices.
• Marginalize domestic entrepreneurs.
• The financial strength of foreign players would displace the unorganized
players.
• Absence of proper regulatory guidelines would induce unfair trade practices
like Predatory pricing.
The arguments against FDI in Indian retail market are similar to the arguments used
during the era of industrial licensing, which was meant to protect small-scale
industries. . But eventually when licensing was abolished small-scale industries have
not died. Instead, they have learnt to co-exist as suppliers to large-scale industries.
The political bosses have to see the reality and make others understand that the risk
to the local grocer or kirana shop is the same from a Giant or a Big Bazaar, or Star
India Bazaar, as it would be from a Tesco, or a Sainsbury. For example, ready-made
garments have displaced the family tailor (but not tailoring), horse buggies or Tongas
have made way for the automobiles (but not reduced travel), and dharamshalas have
been replaced by hotels (but not the cuisine). Practically in no developed or
developing country have ‘global’ retailers wiped out the local retail industry. Even if
FDI was allowed, it would take considerable time for any effects to surface, nothing
will change overnight.
But it has to be understood that change will bring with it a lot of upheaval and
"teething problems." The local retail players, large as well as small, need to be given
support and time to adjust to a changed environment.
Thus the arguments for and against FDI in retailing in the country are purely based
on perceptions of such parties and also the experiences of other countries in this
regard as there has not been sufficient data to support or oppose it. However various
stake holders of retailing industry would love to drag China and Thailand as case in
point to support or oppose FDI in Indian retail. More academic and industrial
research is needed to make any claims in this area. But by not allowing FDI in retail
sector the Government would be cutting down an investment model.
Recommendations
Some of the recommendations I would like to state that:
 The Government and the RBI should evolve suitable lending policies to
enable retailers in the organised and unorganised sectors to expand and
improve efficiencies.
 A national regulatory agency needs to be constituted to study the problems
associated with FDI into the industry and to suggest measures to cope with
FDI.
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5.  Entry of foreign players must be allowed with social safeguards in the sense
that such a policy initiative must add to economic activity and social welfare.
In fact FDI should be permitted only in joint venture format in such product
categories where the threat perception is very high. Similarly FDI should not
be permitted in those product categories where Indian players are already well
established. For some product categories FDI should be permitted for
sourcing only but not for selling in the Indian market.
 India may follow Chinese model which took12 years to open the retail sector
completely to FDI.
 Efforts should be made to improve manufacturing sector so as to absorb the
dislocated workers from the unorganised retail sector due to FDI.
 Regulations restricting real estate purchases, and cumbersome local laws.
 Absence of developed supply chain and integrated IT management.
 Lack of trained work force.
 Low skill level for retailing management.
 Intrinsic complexity of retailing – rapid price changes, constant threat of
product obsolescence and low margins
In the end the logical conclusion is that any strategy in the direction of FDI should
ensure that domestic players are not unduly displaced and sufficient opportunities are
available for the growth of domestic players. At the same time the government
should not let go a glorious opportunity offered by the largely untapped and highly
promising retail sector.
References:
1. A.T. Kearney’s Report on Indian Retail, 2008.
2. Mukherjee Arprita/ Nitisha Patel “FDI in Retail Sector- India,pg 37-45
3. Nitin Malhotra “Indian Retail Sector—A PRIMER, ICFAI University press
4. Dr.R.KBalyan “FDI in Indian Retail- Beneficial or Detrimental-research
paper
5. B.Congnizance.-.The IIT An E-Magazine, Google search
6. l.Damayanthi/S.Pradeekumar-FDI is it the Need of he Hour? Google search
7. Dipakumar Dey-Aspects of Indian Economy-Google search
8. Swapna Pradhan-‘Retailing Management- text & cases, Tata McGraw Hill
9. P.Vanita, G.Prakash Raj -FDI In Indian Retail-research paper www/
jeyabal.com
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6. 10. Mohan Guruswamy, Kamal Sharma, Maria Mini Jos –“FDI in Retail-111”
www/India watch.org
11. The Evolving Retail Market in India- www/icsc.org
12. The Economic Times
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